South Africa has been downgraded to junk status by Standard & Poor’s, and Fitch Ratings. As this may not have short-term effects on the average South African,the long term effects of being downgraded will lead to higher interest rates and making life a lot more expensive than before.
This is according to CarZar online car-buying tech-startup joint-MD, Fernando Pinheiro, who says that the costs to maintain a vehicle or two as is common in a household, is likely to increase due to the current downgrade of the country.
He said that South Africans can expect to see changes in financing of cars, petrol prices, as well as insurance costs.
What the junk status means for car financing
“One can expect an increase in the risk premium, essentially meaning that lenders will increase interest rates, as a result of a perceived ‘greater risk’ in default.
“Higher interest rates increases the cost of families paying for loans from banks – financing things like home loans and vehicle finance payments,” said Pinheiro.
Standard & Poor’s predicted that interest rates would rise‚ regardless of their downgrade decision.“We think that ongoing tensions and the potential for further event risk could weigh on investor confidence and exchange rates‚ and potentially drive increases in real interest rates,” the ratings firm warned.
If interest rates go up‚ as S&P expects‚ the cost of borrowing goes up. It increases your credit card repayments and the amount you need to pay the bank every month, for your short-term loan, or car and home loan, Pinheiro said.
Pinheiro forecasts that junk status will impose a ‘cascade effect’ in the entire financing industry; increasing the interest rates of new contracts and making it more expensive to acquire new vehicles.
“If, in your current financing contract, the interest rates are not fixed (e.g. adjusted according to the base interest rate of the government), you should think about selling your vehicle as soon as possible,” says Pinheiro.
What junk status means for car insurance
The downgrade by Standard and Poor’s, and Fitch Ratings, is expected to hit the short-term insurance industry in particular.
“The downgrade will increase the overall cost of foreign capital for South African entities, due to high interest rates and strong devalued currency. Therefore, financial institutions will have to transfer these costs to the market, by increasing the base interest rates. Junk status will impact the entire auto-trade industry, from spare part costs to insurance premium of most vehicles, especially the imported ones. If your current insurance contract is about to expire, you may see a substantial increase in the monthly premium,” said Pinheiro.
The cost of motor parts – of which the majority are imported – will increase exponentially, therefore leading to increased repair costs, followed by growing premiums for policyholders, according to the South African Insurance Association (SAIA) chief executive, Viviene Pearson.
She said that South African consumers and businesses should prepare themselves for an increase in their car insurance premiums.
“This could expose consumers to financial risks in the event of a loss or damage to assets. Furthermore‚ motor-body repairers’ building industry, and others‚ will feel the pinch of less work‚ leading to job losses,” said Pearson.
What junk status means for petrol
A weaker rand means that petrol prices are likely to rise. If petrol prices go up‚ food prices will follow. The raw ingredient of petrol is oil‚ which is bought in dollars. When the rand weakens‚ oil prices will therefore rise and so will the price of petrol.
The knock-on effect of a weaker rand is higher transport costs. Higher transport costs affect the price of everything moved by trucks – from food to imported goods, and anything you buy at a shop.
Economist, Dr Azar Jammine, said: “If the rand goes into freefall and reaches R16 or R17 to the dollar‚ inflation will rise‚ so will food prices and the petrol price will rise. Households will suffer.”